PICO RIVERA >> The 9,400-student El Rancho Unified School District’s financial problems deepened at year’s end with the downgrading of its bond rating and a notice from the county Office of Education raising concerns that the district won’t be able to meet its “financial obligations” over the next three school years.

As a result, the district is facing a possible takeover by the state Department of Education if it doesn’t get its finances in order — which will require deep spending cuts.

The district is facing an estimated $6 million to $8 million budget shortfall for the 2014-15 school year, said Superintendent Martin Galindo, who verified that the district is in jeopardy of being taken over by the state.

If the state takes over the district, the superintendent would be removed, the school board would become an advisory body, and the state would make the cuts required to balance the budget, Galindo said.

That said, Galindo said he believes the district will be able to satisfy the county’s reserve requirements for this year and has launched an aggressive cost-cutting plan to address the projected 2014-15 deficit.

“Unfortunately, El Rancho has been dealing with deficit spending for basically five out of the last six years,” said Galindo. “Part of it is related to declining enrollment over the last six years. When you have that decline, you have to make the requisite cut in expenditures. And unfortunately the district has not done that.”

Since the 2008-09 school year, the district has lost approximately 1,400 students resulting in an average annual loss of $1.5 million in revenue, Galindo said.

The district expects a deficit of about $2 million this year. Its reserves have fallen by 80 percent, from $13 million in 2008-09 to nearly $2.7 million for 2013-14, Galindo said in a Jan. 24 letter to the district’s staff.

“Every year since 2010-11, they pretty much have had to take from that reserve an average of $3 to $4 million a year,” Galindo said Thursday in a telephone interview.

That was part of the reason for Moody’s Investors Services Dec. 23 downgrade of the district’s bond rating, which affects approximately $69 million in general obligation bonds.

Moody’s said the downgrade “reflects the district’s extremely limited and downward trending General Fund balance, brought on by four consecutive operational deficits.”

Moody’s also gave the district a negative outlook, which means another downgrade is possible.

“The negative outlook reflects near-term budgets and projections for the next three fiscal years which indicated that the district will remain structurally imbalanced absent a successful implementation of the district’s restructuring plan,” said Moody’s.

The letter from the Office of Education requires the district to adopt a fiscal stabilization plan that restores a positive fund balance and the required 3 percent reserve. The office calculated El Rancho’s reserves at 1 percent for this year, negative 6.8 percent for 2014-15 and negative 13.6 percent for 2015-16, said the letter.

Since the reserve levels are below state requirements, “we are requiring the District develop, adopt and submit with its 2013-14 Second Interim Report, a fiscal stabilization plan” that restores the minimum reserve.

The letter also expressed concern that continued deficit spending will “severely impact the District’s solvency in future years.”

Galindo said the Moody’s downgrade will not affects plans for school improvements, but it could affect future bond sales if the district fails to get its finances in order.

However, rating services generally don’t restore a bond rating as soon as financial improvements are recorded, because the rating agency wants to make sure the improvement isn’t temporary, similar to a person’s credit rating after a bankruptcy. Rating agencies want to see more of a track record. Interest rates are higher after a downgrade, and it may be more difficult to find buyers for the bonds.

Another problem is the number of employees the district has and the cost of health and welfare benefits, said Galindo.

“We’ve seen increases every year of the last six years for benefits in our district,” he said. “And we provide some of the highest benefit contributions in the county.”

Until recently, the district paid full benefits to employees who worked over four hours a week.

El Rancho has been dealing with the need to cut expenses since about 2002, when the county discovered an $11 million deficit. In 2008, the recession put additional pressure on the budget.

“The employees have been given furlough days over the last four years,” said Galindo. “I think our employees have really done their best to try to help the district meet its financial obligations. But we’re still deficit spending.”

Galindo said the district will need to “right size” the number of employees to match the number of students. The district will also have to negotiate further cuts with the school unions.

Galindo outlined other steps the district will be taking in the letter to employees, including a virtual freeze on attending conferences, a hiring freeze, leaving positions vacant and covered by other employees, continue not providing substitutes for absent clerical and custodial employees, no subs for staff in the district office, substitutes for school psychologists and counselors will be determined on a case-by-case basis, consolidate offices, review staffing levels and develop a plan to spend less on electricity and water.

“We will meet with the leadership of our unions/associations to provide the same information provided to the ERUSD Board of Education about our budget and the events that led to this ‘negative’ budget,” said the letter.